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The Dynamic Effects of Currency Union on Trade

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  • Bergin, Paul R; Lin, Ching Yi

    (University of Calfornia, Davis; National Tsing Hua University.)

Abstract

A currency union’s ability to increase international trade is one of the most debated questions in international macroeconomics. This paper studies the dynamics of these trade effects over time. First, empirical work with data from the European Monetary Union finds that the extensive margin of trade (entry of new firms or goods) responds several years ahead of overall trade volume and actual implementation of the monetary union. This implies a fall at the intensive margin (previously traded goods) in the run-up to EMU. A dynamic stochastic general equilibrium model of trade studies the announcement of a future monetary union as a news shock lowering future trade costs, and finds that the early entry of new firms in anticipation is explainable as a rational forward-looking response under certain conditions. Required elements are sunk costs of exporting and ex-ante heterogeneity among firms. The findings help identify which types of trading frictions are reduced by adopting a currency union. Findings also indicate that a significant fraction of the welfare gains from a monetary union are based upon expectations for the future, so that continued gains depend upon long-term credibility of the union.

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Bibliographic Info

Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 11.

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Date of creation: 2010
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Handle: RePEc:cge:warwcg:11

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Keywords: currency union; extensive margin of trade;

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References

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Citations

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Cited by:
  1. Florian Mölders, 2012. "On the Path to Trade Liberalization: Political Regimes in International Trade Negotiations," Discussion Papers of DIW Berlin 1245, DIW Berlin, German Institute for Economic Research.
  2. Campbell, Douglas L., 2013. "Relative Prices, Hysteresis, and the Decline of American Manufacturing," MPRA Paper 51723, University Library of Munich, Germany.
  3. Türkcan, Kemal, 2014. "Exports Margins in Austria’s Export Growth," MPRA Paper 53085, University Library of Munich, Germany.
  4. Cavallari, Lilia & D'Addona, Stefano, 2013. "Trade margins and exchange rate regimes: new evidence from a panel VAR," MPRA Paper 51585, University Library of Munich, Germany.
  5. Türkcan, Kemal, 2014. "Investigating the Role of Extensive Margin, Intensive Margin, Price and Quantity Components on Turkey’s Export Growth during 1998-2011," MPRA Paper 53292, University Library of Munich, Germany.
  6. Campbell, Douglas L., 2011. "Estimating the impact of currency unions on trade using a dynamic gravity framework," MPRA Paper 35531, University Library of Munich, Germany.
  7. Douglas L. Campbell, 2013. "Estimating the Impact of Currency Unions on Trade: Solving the Glick and Rose Puzzle," The World Economy, Wiley Blackwell, vol. 36(10), pages 1278-1293, October.
  8. Auray, Stéphane & Eyquem, Aurélien & Poutineau, Jean-Christophe, 2012. "The effect of a common currency on the volatility of the extensive margin of trade," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1156-1179.
  9. Mario Larch , & Wolfgang Lechthaler, 2011. "Whom to Send to Doha? The Shortsighted Ones!," Kiel Working Papers 1695, Kiel Institute for the World Economy.

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